Power's Play 02/15/01

CFOG was wrong about John Powers. At least that's how it looks now that Powers has taken a hard line on the River Park Square parking garage mess. Contributors to the political action committee Citizens for Fair and Open Government, which claimed that Powers was an agent in a vast Cowles conspiracy during the strong mayor election last fall, should be surprised. They were perhaps expecting that the new mayor's first act would be to offer the Cowles family a blank check; instead, he has filed a new complaint that appears to raise the city's chances of wriggling out of the public-private partnership that turned sour almost immediately.

Written by the mayor's special counsel, Spokane attorney Laurel Siddoway, the legal arguments in the new complaint appear tighter than those put forth by Yale Lewis of Seattle, the attorney hired by a majority of the Spokane City Council last spring to prosecute the case.

Any way you slice it politically, it was a surprisingly bold move for Powers. While a few may have actually believed he would simply let the developer dictate the future course of action on the garage, most believed he would lead with a peace offering of dropping the existing complaint and calling for mediation. His actions suggest that he believes the best way to get the issue solved is from a position of strength.

"I have the utmost confidence in the approach that we are taking to achieve resolution of this longstanding, complex, expensive problem," says Powers. "The city remains very interested in trying to resolve it through negotiations with all the interested parties, but at the same time, we are committed to getting this matter behind us through the courts, if that's what it takes."

"The thing that impressed me about John was that he didn't have any preconceived notions of where I should end up," says Siddoway. "He said to follow the facts -- he just wants to protect the interests of the city."

The complaint, which was filed in Superior Court last week, does reflect Powers' less conspiracy-minded approach to the problem. While Lewis's complaint alleged a wide-ranging civil conspiracy, with a variety of consultants, public officials and private business people intent on defrauding the city, Powers' complaint views the problem as rooted in a series of mistakes. In dropping such arguments, Powers has made the city's case more practical -- and less personal. Not only was the charge of civil conspiracy considered quite difficult to prove, but it was also a non-starter for negotiations. The Cowles family -- developers of River Park Square and the city's partner in the garage -- was said to be loathe to negotiate with a party that leveled such accusations against them.

The new complaint does mirror Lewis's work on issues related to the role played by Walker Parking Consultants in the garage's failure to pay its own way. The Walker Report of 1996 was relied upon by all parties for guidance on the project. It was also the crucial document in determining the price the city would ultimately pay for the garage and how much the garage would be charged for rent on the property beneath it. In the first few years of the expanded garage's operation, Walker's projections have been shown to have been so overinflated as to provoke a charge of professional malpractice from both complaints the city has filed in the case.

In taking a more businesslike and less personalized approach to the case, Powers appears to be claiming independence from any of the interest groups and citizen activists that have see-sawed at the extremes of this debate for the past five years. He is also trying to insulate himself from an issue that has been political poison to everyone who has touched it. Mayor Jack Geraghty narrowly lost his reelection bid in 1997, in part, due to his perceived complicity in what some, even then, viewed as a bad deal. And last year, Mayor John Talbott was turned out of office, in part, for being too hard on a project that, in total, most people support. To date, the garage has been an equal opportunity career-wrecker.

"This is just a simple case of business litigation," says Siddoway, whose last public performance was to derail the controversial Lincoln Street Bridge project. "It's not about politics or conspiracies. What it is about is a deal that was supposed to be profitable and now is sideways to the tune of $2 million a year."

Powers has also drawn a contrast to Talbott in hiring a local attorney to handle the case. Talbott suggested at a campaign debate last fall that it would be hard to find lawyers in Spokane who weren't in one way or another involved in the project. Consequently, Talbott presided over what became an almost bigger controversy in hiring Lewis, a friend and former associate of Councilman Steve Eugster, without any requests for proposals from other law firms. And the fees charged by Lewis (now at more than $800,000) appear to be ridiculously high -- especially in light of the fact that Lewis and his work have been replaced by the new complaint and Siddoway. To paraphrase Talbott's own rhetoric, that money could have fixed a lot of potholes.

But the way Powers is handling things is not without peril, as it all seems calculated to encourage prompt action. In reasserting the city's desire to take apart the financing of the garage, the bondholders, who see their investment slipping away, may be coaxed from their wait-and-see stance to jump into the pool of lawsuits. It's also known that in April, Standard and Poors and Moody's will reconsider Spokane's public bond rating. So if the mayor hopes to use the new complaint as leverage to get the developers to the table, he may want to do it fast. It is believed that if better prospects for settlement don't exist by April, the city's bond rating could take another beating. So, at least on that front, the clock is ticking.

But the new complaint appears to be more effective than the last one in another important way, too. While Lewis's complaint argued that all contracts related to the project should be voided due to the civil conspiracy, Powers' suit aims to enforce the contracts as originally written rather than void them. Contracts are well-protected in the legal world, since lots of people would like to break them. In sidestepping that difficulty, Powers seems to have lowered the bar the city will have to clear in proving its case. To get there, Siddoway claims to have accomplished what a handful of journalists and more than $800,000 in legal fees to Yale Lewis never could -- she found what she believes to be the deal's Achilles Heel right there in the black and white of the city's original ordinance.

A new theory

The centerpiece of the city's new complaint can be described as attempting to get the city off on a technicality -- but technicalities are what contracts are all about. The argument is that the 1997 ordinance that was passed as an emergency to allow the city to participate in the project is quite different than what is being applied through the lease between the developer and the Parking Development Authority, the agency responsible for the garage. Up to now, everyone believed that when the garage's income fell short of its expenses, the city's parking meter fund would be tapped to cover the difference. But how that money is tapped -- how the payment is triggered -- is where the details become important.

The garage has three major areas of expense: day-to-day operating expenses, the monthly ground lease and the bond payments. Siddoway discovered that bond payments are not even mentioned in the ordinance adopted by the City Council in January, 1997. The parking meter money is "pledged to pay Operating Expenses of the Facility and Ground Lease Payments in the event that Facility revenues are insufficient," the ordinance reads. So Siddoway's contention is that the payment from the parking meter fund is triggered only when the operating expenses and ground lease, added together, exceed the garage's income each month. "The city specifically did not pledge any assets of the City to the payment or interest on the Foundation's bonds," the new complaint charges.

Under this reading, the parking meter fund would not have been triggered in July, August, November and December of 2000, even though the facility was losing money due to its debt service during those months. Siddoway says that somewhere between the time when the ordinance was adopted and when the lease was sent to the PDA to be signed, the deal changed and bond payments were inserted into the mix. So while there may not have been a civil conspiracy, according to the city's new theory, there appears to have been at least a conspiracy of silence over slipping in such a change, as a variety of people close to the deal must have known.

That is if it is a change at all, and the developer's attorney doesn't believe it is. Certainly it could be argued that bond payments fit under the heading of operating expenses, but Les Weatherhead, who represents the Cowles family, says that parsing words now doesn't change the fact that the city pledged its participation.

"I believe they are mistaken on the reading of the ordinance," he says. "We continue to read it the way it's always been read. The city was bargaining to induce the construction of a parking garage -- that's what the city wanted, and that's what they got. The city was looking at becoming Tacoma, and the City Council didn't want to become Tacoma."

Downtown Tacoma lost its retail base in the 1980s when a mall was constructed only a few miles away, and it has never recovered. Weatherhead says the evidence proves that the city is getting what it hoped for in the deal -- an additional $5.42 million in tax revenues directly related to the project since August, 1999.

"The city has reaped an enormous benefit from my client's performance of their commitment," Weatherhead continues, "so it seems particularly unfair to us that the city won't play its role."

Still, it appears to be a foothold for the city, which could be on the hook for as much as $65 million over the life of the project if nothing changes, according to Siddoway's interpretation of a recent study by Keyser-Marston Associates.

Winning this argument would get the city off the hook for much of that burden. But it's almost a moot point, because if won, the city's argument would result in the imminent bankruptcy of the garage -- followed (or preceded), many believe, by a drop in the city's bond rating, an investigation by the federal Securities Exchange Commission and/or claims of fraud by bondholders who will argue that they relied upon the city's parking meter pledge in making their investment.

spokane v. walker

Despite the possibilities this new theory offers, the city's best argument remains against Walker for its failure to accurately project the garage's future success. And there are enough curious facts and suspicious assumptions in their report to keep a jury's eyebrows raised for days. The consultant adopted a high average length of stay -- much higher than the national average. Walker disregarded how many people were actually parking downtown and inserted a number they generated instead. And the impact of competing parking areas in the capture zone was never factored in.

To build its case even more, the new complaint reasserts that the existence of a previous report written for Robideaux and Associates -- the mall's management company -- proved that Walker knew it was treading on thin ice. In the previous complaint, the existence of that 1995 report, which was allegedly never disclosed to the city and which had significantly less aggressive numbers in it, was offered as proof of the civil conspiracy. The new complaint agrees that it wasn't disclosed, but uses it to bolster the charge that Walker failed to perform its duties. The developer's attorney and others, however, dispute that the 1995 report was not disclosed, as a copy has been on file at City Hall for some time.

The developer could easily argue that it, too, has been damaged by Walker, yet it has failed to make that claim. Weatherhead says there are no plans to pursue damages from Walker, saying that the pressing issue is to resolve the dispute with the city. While the controversy has persisted, the Cowles have been covering the garage's expenses -- to the tune of nearly $2 million so far.

Consultants like Walker are no strangers to lawsuits, especially when their work is relied upon as it was here. Walker's name went out with the bond issue's official statement, which dictates the highest level of reliance possible.

Siddoway says it was curious that Walker reportedly asked to have its liability limited as its contract for services with the city was being negotiated. She credits former assistant City Attorney Stan Schwartz for holding the line on the liability clause. Schwartz now works for Witherspoon Kelley, the developer's law firm, although he is not involved in the dispute with the city.

Consulting firms like Walker routinely carry liability insurance to protect them from cases just like this one. A year ago, John Dorsett, principal with Walker, told The Inlander that his firm's projections were not being realized because the project was not materializing the way they had been told it would. Since that time, Walker has made no significant public statements, although it did file a claim against the city for professional defamation -- a hard charge to prove in light of how far off their work has proven to be.

Still, the case against Walker is complicated by the fact that another consultant -- Coopers and Lybrand -- looked at their work and the City Council still proceeded. Whether Walker was solely relied upon is a crucial element, and the fact that the City Council ignored critiques of Walker's work suggests they were relying on more than just Walker's numbers. Perhaps they understood the high level of risk and even accepted the artificially high numbers, but went ahead anyway due to political considerations and to prevent the further decline of downtown. That's what Walker can be expected to argue if the case comes to trial.

getting to the table

Something the people of Spokane have seemed to have wanted all along here -- as gauged through public opinion polling and in the election -- is an equitable solution to a problem that doesn't appear to offer any easy way out.

"You never know what's possible until people start talking," says Weatherhead. "We will continue to be open to discussions, but we continue to be wary of the city's ability to come to a conclusion."

Weatherhead refers to the fact that while Mayor Powers may have control of the litigation and any negotiations it may spawn, any resolution would have to be adopted by the City Council. Powers may have taken the first step toward winning that vote by signaling he would not be soft on the developer. Still, it will take a lot of concessions from the Cowles to win over Eugster and Cherie Rodgers. But Powers may be able to sway Steve Corker, who seems to be a somewhat changed councilman since his failed run for council president. And then there's the new councilman or woman, if one can be agreed upon.

Both sides are also hoping for more clarification when the state Supreme Court rules on the issue of whether public officials can be compelled to write checks they don't want to write. But current thinking is that the court may rule very narrowly on the question of whether City Attorney James Sloane and City Manager Henry Miggins can be forced to tap the parking meter fund. While attorneys on both sides argued in ways that seemed to encourage the justices to offer more wide-ranging guidance, the questions from the bench during the hearing were tightly focused.

While the two sides appear to be far apart in what they might agree upon in some kind of settlement, there are at least some starting points. The developers have made overtures in the past that include sharing in the garage's shortfalls to some degree. However, they come from a perspective that the garage will outgrow its woes -- a position not shared by the city. As such, the developer's last proposal would have capped their involvement at $3 million -- a hefty sum, indeed, but nothing close to the $65 million worst-case scenario.

The city seems intent on not being the party that's left holding the bag. In fact, another new argument contained in the complaint is that the Supreme Court's ruling of 1997, which upheld the city's involvement in the project, could be revisited because things have changed so drastically since that ruling was made. Specifically, the Supreme Court relied heavily on the fact that the city would be getting "consideration" for its participation in the public-private deal. At the end of 20 years, the city would own the garage, which was then advertised to be a money-making operation. Now, however, the garage looks more like a burden, even 20 years from now, which seems to push the deal over the line that demarcates public-private partnerships from public gifts to private entities.

Meanwhile, a wild card proposal comes from the city's bond attorney, Roy Koegen, who put together much of the original deal. Since last summer, he has advocated a combination of refinancing the bonds at today's lower rates, perhaps with a longer term, along with concessions from the bondholders. Under his plan, the city could also reclaim the reserve fund that was required of the last bond issue (if the new bonds are issued as revenue bonds of the city, that reserve fund won't be needed, again bringing down the size of the debt). All that could make the payments significantly lower. While the bondholders' cooperation was always considered the toughest part of the deal, the city's new theory that it isn't obligated to cover bond payments at all could make this approach unworkable.

Siddoway says the best way out is for the city and the developer to come to some kind of agreement -- an agreement honestly based in the kind of shared pain true partners should accept. Then, together, they should invite Walker to the table, or, if they're not interested, take them to court to get another chunk of cash into the mix. Siddoway believes Walker wouldn't want to take its chances with a jury and would, on the advice of its insurance company, prefer to put the whole mess behind them. By sharing the pain three ways instead of two, the garage may get closer to penciling out.

But the first step is getting to the table, something all sides say they are anxious to do. And now, with the city's cards out on the table, Powers' ability as a mediator, a politician and a horse trader will take center stage. If he was looking for a way to put the "strong" into strong mayor, he's got it.